Burgers beat burritos — McDonald’s snaps back

Opinion: The Golden Arches is on a tear this year, even surpassing Chipotle

Despite headlines about worker protests, declining same-store sales, a cluttered menu and frustratingly long wait times for customers, McDonald’s Corp. has served investors well this year.

McDonald’s
MCD, +0.70%
stock has returned 7% this year, beating the S&P 500 Index’s
SPX, -0.23%
2% advance. In fact, McDonald’s has far exceeded fast-food darling Chipotle Mexican Grill
CMG, -0.26%
whose shares have fallen 7%. That may not completely satisfy McDonald’s investors, who stood by in 2006 and watched the burger chain divest Chipotle in one of the worst corporate moves ever.

Anyway, it’s been a turnaround year for McDonald’s, whose stock rose less than half that of the S&P 500 last year. A lack of same-store sales growth was the main culprit.

McDonald’s began an investor meeting at 11 a.m. New York time today, featuring Doug Goare, the company’s president for Europe, and Dave Hoffmann, president for the Asia, Pacific, Middle East and Africa regions. Goare emphasized the “meaningful investment” in kitchen and service platforms, as well as customer convenience through the continued addition of self-order kiosks.

Goare said the weak European economy was making the company’s forecasts “pretty soft,” although sales growth is “projected to be positive overall.” He pointed to Russia’s currency devaluation as a major challenge and said “we are working to increase our relevance among German consumers.”

Finally, Gore pointed to the tremendous growth opportunity he sees in Europe, saying that when considering the area’s population and 7,600 McDonald’s restaurants, “there are half the restaurants and double the people, compared to our business in the United States.”

McDonald’s shares trade for 16.4 times the consensus 2015 earnings estimate of $6.26 a share. The consensus 2014 EPS estimate is $5.76. Based on a quarterly dividend of 81 cents, the shares have a dividend yield of 3.16%. That might not be an impressive figure to an investor looking for short-term growth, but it compares quite well with the 2.50% yield for 10-year U.S. Treasury bonds.

McDonald’s has reported six straight quarters of declining same-store sales in the United States, although the company’s international sales have held up better. For the first quarter, sales were up 0.5% from a year earlier, but U.S. same-store sales were down 1.7%, blamed in part for the severe winter weather.

Overall sales were up 1% to $6.7 billion, but net income was down 5% to $1.2 billion, which the company blamed, in part, on a prior-year tax benefit. First-quarter EPS came in at $1.21, down from $1.26 a year earlier.

So where’s the good news? Why is McDonald’s relatively hot this year? For one thing, the dividend and the company’s status in the low-priced fast-food space make it a defensive play in what may be an overheated stock market. Another item that gets lost in the quarterly earnings coverage is that the company keeps growing its sales per share.

First-quarter sales per share increased to $6.73 from $6.53, according to FactSet. That’s a 3% increase, exceeding the 1% increase in sales, reflecting continued share repurchases. The company has also boosted its annual sales per share every year for the past 10 years. That is a very impressive track record.

McDonald’s generates a lot of cash — $1.9 billion in the first quarter, up 1% from a year earlier. CEO Don Thomson struck the right tone during the company’s conference call in March when he said: “As our business continues to generate significant levels of cash, our philosophy regarding the use of cash remains unchanged. Our first priority is to reinvest in the business to capitalize on the sizable long-term growth opportunities that exist. And after reinvesting in the business, we’re committed to returning all of our free cash flow to shareholders through dividends and share repurchases.”

There has also been good news recently, with comparable sales for April growing 1.2%. U.S. sales in April were flat, which was an improvement and underscored the company’s claim that poor weather was to blame for much of the first-quarter U.S. sales decline. Meanwhile, sales in Europe were up slightly and sales in the company’s Asia/Pacific, Middle East and Africa segments rose 2.9%.

The company is still growing and, according to Thomson, is on track to open at least 1,500 new restaurants this year and to remodel 1,000. The company also expects to finish rolling out new kitchen equipment to all of its restaurants this year.

McDonald’s has plenty of homework to do. But the company has a long track record for disciplined investments in growing its business. And if it can return to steady same-store sales growth in the United States, the stock should have plenty of upside.

It’s a conservative play for long-term investors who can commit for several years. It’s a dividend play. And we have seen a similar pattern several times over recent decades, where the company has had service or quality problems, which have been turned around through improvements in the ordering system, equipment and the introduction of menu items.

(This story was updated to add comments and information from the investor meeting in paragraphs four through six.)

Philip
van Doorn

Philip van Doorn covers various investment and industry topics. He has previously worked as a senior analyst at TheStreet.com. He also has experience in community banking and as a credit analyst at the Federal Home Loan Bank of New York.

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Philip
van Doorn

Philip van Doorn covers various investment and industry topics. He has previously worked as a senior analyst at TheStreet.com. He also has experience in community banking and as a credit analyst at the Federal Home Loan Bank of New York.

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